Change for the banks?

Yesterday there was more gloom and doom about banks, as yet more punishments were imposed for wrongdoings in the past. I know from the tone of anti bank contributions here that many of you will be pleased action has been taken, or will be urging more and tougher action.

I want to talk about the future, not the past. I want to ask the question, what type of banking services do we need to fuel a sensible recovery and to meet the needs of individual and company customers over the next decade? Why have so many people fallen out of love with their banks, or moved from indifference to outright hostility?

Most people need a bank account to carry out transactions in our electronic world. If you need to pay the gas bill, receive your wages, or draw out cash you need access to basic banking services. People want it to be secure, swift and cheap. There should be economies of scale. Although many say they do not like or trust banks, in pratice most people most of the time do trust our main banks to keep our money safe, to settle our bills on time by Standing Order or Direct Debit, and to send us accurate records of what we have done.

The criticisms of these central basic services are that they can be too expensive, it can take too long to move money, and sometimes mistakes are made that can be difficult to rectify. There are second order arguments about whether these servcies are best on line, in branches or by phone. Different customers want a differing combination of these methods of servcie delivery. High Street banks need to get better at delivering what people want. More banks and more choice of bank, coupled with better portability of accounts would help a lot.

Many people and companies also need to be able to borrow money. They may need money for the short term, to handle cash flow problems. Individuals may need to borrow until payday, or ahead of a rise or bonus. Companies may need to finance working capital, awaiting payment by customers or movement of stock.

They may need money for longer term investment. Most individals need a mortgage to buy a house. Many companies need money to buy a property or to finance plant and equipment.

Today there remain serious cricisims of the availabilty and price of credit. Mortgages have been in very short supply, and the requirements are now much more stringent than before. There are signs of improvemetn from a low level. Property lending for companies has all but dried up, yet this used to be one of the main forms of long term bank financing for companies. Smaller companies report banks keen to get early repayment of loans, and only willing to lend with large fees and charges added in.

People and companies also may need help with investing savings and surpluses. They have other sources of advice and assistance, as the banks have found it difficult to recruit and retain the more expensive investment personnel needed to assist in most branches.

The banking models of the last decade created mega banks whose main products and services were directed at the larger companies. They hired very expensive people to invent and sell ever more complex products. They did so by persuading Companies treasurers they needed various types of derivative insurance. They then extended these products to back a variety of savings and loans products, and to overlay pensions and other funds. This made big money, and enabled the staff to enjoy huge salaries and bonuses . The branches did not have empowered or expert staff to look after normal customers.

A future bank has to accept that there will not be so much lucrative derivative, future and options business. There will be a stronger demand for more basic loans and savings products where costs are under better control. This means lower overall remuneration for the practitioners, and more service for the smaller and medium sized customer. It will need a different kind of branch banking.

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60 Comments

On Radio Five live yesterday I caught the end of an interview about a Community Bank run by Two business people it sounded something that the Post Office in conjunction with the local council could run.
This would give the depositors a better return than they get at the moment and would help those who take out payday loans at massive interest rates!
And save the local Post Office!

The biggest problem for many businesses is that banks who were in difficulty, such as Natwest/ RBS started calling in all the loans that they could regardless of the quality of the borrowing and pushing up margins & fees hugely. This, exactly at the time when these businesses mainly needed additional lending due to the downturn. They even prevented businesses borrowing from other lenders just to put pressure on them to repay.

The result of this is the total lack of growth we have clearly seen. Why on earth did the government bail them out, and even buy some of them, yet fail to stop them maiming and robbing so many businesses? The new banking regulations are largely dealing with yesterday’s problem. Lending is still too tight and on too high margins for many perfectly sound borrowers.

I see that the green deal keeps talking about the “golden rule” that the energy saving measure must pay for themselves. A shame they do not have the same rule for the absurd wind farms and PV which clearly will never come close to doing so. I also see that the people who assess this “golden rule” are the same as the ones profiting from the sales. Rather a conflict of interest one imagines. Very few such measure pay for themselves on a sensible time scale especially with interest rates of 7% plus fees.

Will Chris Huhne, I wonder, be repaying the nearly two years of MP’s and minister’s wages, pension and the £17,000(?) he got from resigning from the cabinet. All drawn while he knew perfectly well what he done and that he clearly should have resigned promptly at the time. Perhaps about £300,000 of public money?

Or perhaps even the 10 years of income drawn knowing full he had committed a serious criminal act that should debar him perhaps as much as £2M?

Will he also finally admit that the green tosh he was pushing so endlessly was exaggerated drivel too? Maybe even tell us the real reason why he was pushing the agenda so hard in direct conflict to the science, the economics and the engineering.

Close the bank down. Lose the onerous liabilities.Protect the depositors to the limits announced. Ensure bondholders left are coverted to equity and then let them engage new management with a relatively clean slate balance sheet.

The state ‘got out of the way’ and the banks crashed themselves. The government then dived in to save them as they would have caused untold chaos for business, individuals and the economy had they folded. Maybe even civil unrest. The government then ‘got out of the way again, but still subsidises them through insurance, cheap money and most importantly high paying safe job for the chaps. You have to remember that as private companies with the state ‘getting out of the way’ ,your business is less important than the banks business and if the loan can be called in and is beneficial to the banks that is what will happen. Now give them their money and ‘get out of the way’.

Look, if a burglar robs your house the police will come and complain that you did not close your window and so let the burglar get in. This means you are partly culpable. But ultimately most of the blame lies with the criminal, who is the one up to no good.

The regulators might have been completely incompetent but ultimately most blame lies with the bankers, who engineered themselves huge bonuses on the basis of what turned out to be fake profits and as part of this they practically sank the world economy with what amounted to a pyramid scheme of bad debt (not to mention the LIBOR scandal). If accountants signed off dodgy accounts then they too should be held liable.

“High Street banks need to get better at delivering what people want.”
I got into £2,000 debt after twenty years with the NatWest. They turned on the screws and told me they needed the money ASAP.
I went round the corner to the Nationwide where I have been ever since. They provided me with a repayable plan (it took just 3 months) and treat me like a person when I go in, Now I have inherited my father-in-laws small fortune (ironic), I keep it there and they look after it for me fairly and with free advice whenever I ask.
I am, in other words, a happy bunny.

Natwest were clearly more in need of the money than you were despite the government owning it. Total incompetence by the government owners of it. Harming bank profits, the economy, the value of RBS and the customers for no reason at all.

Odd how the queue to bash banks was formed by many that wish to understand criminals and let them off.

The ridiculous term Casino Bank is another diversion. Mortgage lending was forced in the USA by the red lines bill. Northern rock wasn’t a so called casino bank. The too tight regulation didn’t do its basic job.

The banks have took the blame for government overspend right through the last decade, and due to sheep like media are still taking the blame.

My only fault with banks, that isn’t their own fault, is cheques. Personally I wish they’d scrap them. I think the clearance time is a nudge to do that but I offer discount for cash or credit card, but still have the trips to the bank for the damned cheques that some insist on.

Firstly mortgage lending wasn’t forced by the red lines bill as a bill isn’t legally enforceable. Congress has to make it into a law first.

Secondly the laws only made it easier to get mortgages, they didn’t force banks to sell risky mortgages as good mortgages to investors; which is what caused the crash.

Thirdly the problem with Northern Rock was that nearly their entire business model involved turning 120% mortgages into secured assets. Once the financial crisis made these assets risky the market dried up and Northern Rock went bankrupt. This wasn’t the fault of the regulation but Northern Rock having a poor business strategy.

Loans may have dried up but forbearance is alive and well. Rather than let property values fall within reach of average earnings lenders are now offering “bank of mum and dad mortgages.” Whatever next ?

Yes it will.
Most owners of small businesses can’t quite square their situation where their business can go bust if they don’t have the finance and talent, with that of bank employees with little talent and no real financial stake of their own, who somehow manage to persuade government backers that terrible things would happen to their employers if they weren’t there earning non-profit related bonuses.

Small numerous free market banks that have to answer to their customers and their shareholders. They should not answer to the government or watchdogs that are at best ineffectual and at worst harmful to the interests of customers, shareholders and taxpayers. The current system of huge banks effectively totally controlled by government only works to enable debt creation and currency debasement so that George or whatever financial illiterate is pretending to be in charge of the economy can continue the gravy train.

Any business that wishes to operate in the UK has to obey the laws created by Parliament and the purpose of the watchdogs is to ensure that these laws are being followed. So banks do need to be answerable to watchdogs.

Also the only banks currently controlled by the Government is the one they had to bail out because their private sector management ran up huge debts.

You claimed that banks had to obey a bill, I pointed out that until a bill is passed by Congress it’s unenforceable. You were the one who made the mistake not me.

I also pointed out your claims that banks were forced to give people mortgages was incorrect as all banks had to do was make it easier for people to get a mortgage. You also ignored that banks tried to sell bad mortgages as good mortgages to make more money, something that the Red Lines didn’t require.

In 2008 the BIS said the banks had $ 600tn in outstanding derivatives. It is probably more now. This can never be repaid. Time to cut this albatross from around the neck of the economy.

Let the free market work and these banks will be gone and new solvent lenders will spontaneously arise, they already are arising. Time to follow iceland and let the banks go, put the management on trial for rate rigging and fraudulent selling.

Why are we still pandering to these welfare dependent non businesses , have they got something on our govt ?

The system acts as a giant wrecking ball, small moves in one direction in rates can wipe out the equity, never mind the collateral, of one side of the derivative bet raising margin calls, and vice-versa when the rates move in the other direction. The central bank merely by lowering rates as they print money have to stump up collateral for one side of the derivative bet. This is QE without end. Fighting fires as you start new fires. Madness.

Warren Buffet once tried to get out from under a large derivative position when he purchased a subsidiary of General Re,and after the ordeal he said that derivatives were “weapons of mass financial destruction”. He likens this unwinding task to entering hell, stating that derivatives positions were “easy to enter and almost impossible to exit.”

A derivative is an future obligation to pay a bet that is leveraged to some underlying. It is a gambling debt. If I lose the bet and am solvent enough to pay, then there is no problem. If I am not solvent enough to pay then the person who was expecting payment now may also have a solvency problem to pay for the bets that he loses.

Netting out the bet payments may result in the actual repayment amount being far less than the notional amount outstanding, but as soon as you get insolvencies and counter-party payments are defaulted upon, then the actual tends towards the notional. Since derivatives are a zero sum game and most everyone was partaking in the same bets you have systemic risk. Insolvencies spread like wildfire.

When the notional is $600 trillion and the global GDP is $50trillion(in good times) and we know the largest banks are probably insolvent, then you have a problem. You have two choices, print money to monetise the losing gambling bets, or let them default. Monetizing the amount required would result in currency collapse and hyperinflation. So we are left with default. What other ideas do you have ? Iceland showed that there is life after insolvent banks, but you have to first let them go.

The government of the day especially a Tory government puts forward the interests of the top management and the elite above the rest of the populations interests. Thus giving us what we have today, A banking system that has destroyed the economy, poor infrastructure and hospitals killing people. The managers and politicians like in third world countries go on to better and higher paying jobs no matter what criminal or incompetent actions they carry out. As we have seen this week. The person is always described as ‘forceful’ ‘egotistical’ ‘threatening’ and so on. They basically threaten everyone that is their modus operandi. Without threats, mainly financial threats, they are nothing and when threatened themselves with veiled intimidation such as being showed the cloth of a supermarket T shirt go to pieces. What does that tell you? High profile ones sacked without pay. Bring the legalities on we can’t wait. Much cheaper and safer in the long run.

A Tory government???
Labour ruined the NHS.
Labour let the banks run riot.
Labour let half a million immigrants in every year.
I agree this government is doing next to nothing to cure the problem, and Major didn’t have the wit pre-1997 to pre-empt it, but the excrement hit the fan on Labour’s watch, doing things it was proud of. Then your friend Mr Blair walked away to make millions like the true socialist he always was. Not.

A Tory government of the day is cutting benefits for the unemployed by such things as making the unemployed pay council tax out of their seventy quid and charging anyone on housing benefits for a spare room. The squeezed middle getting hit for tax credits, and all of use getting scammed by the utility companies and any other privately owned state company whilst giving tax cuts to millionaires. Square that one off, but who said my post blamed the Tories entirely? The Tories however wanted even more Blair ideology when it came the banks. The hospitals where massively improved under Labour even allowing for the management structure changes to allow manager to become business, eading to the state we are in now and the immigrants supplied cheap labour for business which you cheered for. Ram it.

The abiding characteristc of today’s Britain is that the wise (creditworthy) virgins are being fleeced in order to bail out the foolish (indebted) virgins – at all levels. Prominent among the foolish virgins are HM Government and certain banks. To get what you want requires an end to QE, a realistic BoE base rate (about 3%), zero inflation and no bail outs. I don’t hear you advocating these things – indeed the silence is deafening.

A belief that the free market will magically create more banks is as stupid as believing that a forest will instantly regrow because you want more wood. If the banks collapsed new lenders would not appear because lending in the UK would be perceived as being too risky to engage in.

Uni, one of you more odd posts, as there are many new banks in the UK that have recently arrived and set up shop in the “free market”.
They must feel its worth their while having a go.
Metro Bank, Triodos Bank, Handelsbanken, Virgin Money, Co-op Bank, State Bank of India, First Direct and Mand S Money, to name just a few, all competing with the big 5 banks for your current account, your savings account and business accounts.
PS
Forests do replenish themselves its been going on since the dawn of time.

Of the banks you names only Metro Bank entered the UK after the financial crisis. So it’s clear that they very few banks have arrived recently.

I said that forests wouldn’t instantly regrow, not that they wouldn’t regrow. Also in some areas, such as the rainforest, they won’t regrow because the soil is such poor quality (the only nutrients the soil gets is from dead leaves and trees, so once all the trees are cut down their won’t be enough nutrients left for them to grow back).

What SMEs need from banking is mostly dictated by what they experience in the wider economy. Stability and growth provide the borrower with the means to meets its obligations.

Banks should lend on the merits of each proposition and not be target driven. When they make an in principle it should be honestly made and not subject to additional conditions once the customer is on the hook. The cost of borrowing should be as transparent as possible. All this would be a big step for banks. As bad as things have been, there never has been a golden age.

The central and eternal question is when lending should be wholly security driven and when a cash flow lend is right. The perspectives of borrower and lender are never more divergent than on these questions.

In answer to your question , no , not all lending should be wholly security driven .

You make the point that the conditions should not change when the customer is on the hook so if the value of a house goes down , the mortgage holder should not be expected to come up with additional security .

The criteria of security is no substitute for i) viability of the business or ii) proper evaluation of each proposition and the staff and cost of doing that properly .

Historically the people entrusted to make these judgement calls had a minimum of 20 years immersion into the culture of responsible , quality lending including as clerks and sub-managers etc , before reaching the age of 40,45 or 50 and becoming bank managers themselves .

I.E. the elimination process to find and train people so they could authorise lending was 20 years (minimum) . These are the people the banks spent the last 20 years getting wrid of ; probably because they were an obstacle to the pile em high attitude which was taking over .

The banks are going to have to relearn how to lend responsibly and it’s not going to happen overnight because it is a cultural change – a whole culture has to be created from scratch .

So many of the things which have happened during our lifetimes have proved irreversible in practice .

I am unconvinced about relying on bank staff for investment advice – did not HSBC put clients` money into Madoff`s funds? Co-incidentally my wife and I had a meeting with our bank`s relationship advisor yesterday. It was clear that she knew next to nothing about investing – she admitted as much towards the end of our meeting. But she did offer to set up an overdraft facility for £50k (only about one week required) at c2.5-3% to fund a house extension. The trouble is, if we do that we will be clobbered for more council tax if not sooner then certainly later. So the chances are we shall sit on our hands and do nothing.

That sounds a very good rate .
My advice is take it!
Or ,when you are rather older like me,you could well be told as I was-
sorry you are too old- it’s not us banks that make the rules it’s the FSA /Govt or whatever-oh yes we might be able to do a business loan,but that would have to be paid back in two years.
I’m not prepared to pay out of capital so I too am sitting on my hands.
Good luck!

I am old too! In fact I am very old. I suspect that the only reason I was offered an overdraft is that I am credit worthy and do not actually need an overdraft.

If people like me wonder about the tax raising habits of the politicians and hang back on spending money on an extension as a consequence, it is no wonder the economy is sluggish. It is clear beyond any doubt that the politicians in charge (Cameron, Clegg, Osborne) and the opposition (Miliband, Balls) do not have a clue about the impact of their words and deeds on the behaviour of the rest of us.

What was needed was a, can do, lets go for it, uplifting vision – instead we got Cameron leading us to oblivion, a tax borrow and waste, high energy prices, high taxes and EU superstate with Miliband to follow. Who will be even worse, albeit not much.

I suspect you were offered the loan because you sound very sensible and responsible. Might as well go for it the government will only take if off you later if you do not.

In my bones I’ve always suspected the banks and their financial advisors are on par with fortune tellers. In the late 1980’s I got a 5k mortgage. Yes 5k! Endowment. I then fell into the sales talk of brokers and insurance companies. Even for reasons I forgot linking a pension to it! Got compensation for pension mis-selling not linked to the mortgage. Another fiasco. After 15 years payments averaging £50 a month paid of the mortgage which had now become a repayment type I sold the house and paid the mortgage of with the proceeds. How much? £4k! Other small, less than a grand, experiences with credit cards have also set me up well in my distrust of these snake oil salesmen and parasites. No debts, no mortgages is the only way to live. Ram it.

I don’t see how Barclays can make a profit out of retail banking. They have too many branches and their rates are uncompetitive. Closure of more branches and forcing customers to more to internet banking (or incur charges) will have to come.

Another overhead that Barclays have taken on is to hire a (word left out) FSA director as chief compliance officer at a salary of £3 million. (when FSA no great success-ed) How very squeaky clean and what a waste of money.

It was different in the days of big, bad Bob Diamond when the investment banking activities cross subsidised the retail activities.

As most people see it the major problems that the affect them are the low interest rates paid on their savings and the falling lending to small businesses.

The government needs to look at the extent to which this is caused by the requirement to retain larger capital deposits. They need to increase the cash flow through the banks and reduce not increase the restrictions imposed that reduce this.

If the government (or anybody else for that matter) wants the banks to lend more than indicated by the banks’ own credit analysis, the government, or whoever, instead of offering irrelevant funding (which they will want back!!), should be offering to take a share of the risk. Asking the banks to lend more, when, because of the state of the economy, they do not want to is (pick a rude word–Leslie).

Lifelogic–Not just a question of “can” lend–they must WANT to lend, ie they must feel they will get their money back and very reasonably so. They do not feel that way at present and I for one don’t blame them. If they were to make more loans that turned out bad they would get pilloried big time for that not to mention the reduction of the worth of the Government’s, where applicable, and everybody else’s stake.

The banking market continues to be rigged by extensive government interference. The latest episode with RBS + the grandstanding on ‘ringfencing’ is absurd & questions really have to be asked as to how much understanding of finance, business & economics George Osborne has. We need a more competitive banking market – breaking up RBS as you frequently suggest would be a good start – a clear resolution regime for insolvent banks, involving wipe-out of shareholders and bail-ins of creditors, as would happen with companies in any other sector (we are nowhere near this yet), and a realisation that high leverage in a bank is as risky as in any other business. The difference is banks can get away with it & their auditors dont deem them to be insolvent because they have unlimited credit available at the BoE and their creditors are protected by taxpayers. All this needs to go. Lets actually have a proper free market in banking and so free up the flow of credit instead of trying to cover up these fundamental inadequacies with political posturing and endless QE.

As far as consumer banks are concerned these services could be offered via smartphones and the network operator could act as a bank. There is nothing that clever or difficult about retail banking. In fact it would give rise to far more innovative services that the customer wants than the dreary hidebound retail banks will ever arrive at. There would be more real competition between networks than banks will ever have with an explosion of new useful services.

Within 4 years Hong Kong is predicted to surpass both the London and New York as the leading global centre for financial employment from new estimates by the UK based CEBR.
Most likely more complex financial services will increasingly move to HK and Singapore in part to escape EU and UK regulation and because Asian markets have gained critical mass.
The navel gazing EU and UK are in the process of overseeing the decline of their financial markets in world terms but have yet to realise it.

About John Redwood

John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.